Debt, Agency and Management Contracts in Reits: The External Advisor Puzzle
38 Pages Posted: 23 May 1998
There are 2 versions of this paper
Debt, Agency and Management Contracts in Reits: The External Advisor Puzzle
Date Written: April 1998
Abstract
This study investigates why externally advised Real Estate Investment Trusts (REITs) underperform their internally managed counterparts. Consistent with previous studies, we find that REITs managed by external advisors underperform internally managed ones by over 7% per year. Property-level cash flow yields are similar between the two managerial forms; but corporate-level expenses and especially interest expenses are responsible for lower levels of cash available to shareholders (FFO) in externally advised REITs. We document that the higher interest expenses are due to both higher levels of debt and to higher debt yields for externally advised REITs. We posit that compensating managers based on either assets under management or on property level cash flows creates incentives for managers to increase the asset base by issuing debt even if the interest costs are unfavorable.
JEL Classification: L1, G31, J33, L85
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Relative Importance of Stock, Bond and Real Estate Factors in Explaining REIT Returns
By Jim Clayton and Greg H. Mackinnon
-
Measuring and Explaining Changes in REIT Liquidity: Moving Beyond the Bid/Ask Spread
By Jim Clayton and Greg H. Mackinnon
-
Do REITs Behave More Like Real Estate Now?
By I. Chun Tsai, Ming-chi Chen, ...